Rackspace Technology, Inc.

Good afternoon, everyone, and welcome to the Rackspace Technologies first quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one. To remove yourself from the question queue, you may press star and two. As a note, today's event is being recorded. At this time, I'd like to turn the conference call over to Joe Crivelli, Vice President of Investor Relations.

Sir, you may begin. Good afternoon, and welcome to Rackspace Technologies' first quarter 2021 earnings conference call. Kevin Jones, our Chief Executive Officer, and Amar Malatira, our President and Chief Financial Officer, join us today. The slide deck we will refer to today can be found on our Investor Relations website. On slide two, certain comments we make on this call will be forward-looking. These statements are subject to risks and uncertainties which would cause actual results to differ. A discussion of these risks and uncertainties is included in our SEC filings. RAC space technology assumes no obligation to update the information presented on the call except as required by law. Our presentation includes certain non-GAAP financial measures and certain further adjustments to these measures which we believe provide useful information to our investors. In accordance with SEC rules, we've provided a reconciliation of these measures to their respective and most directly comparable gap measures. These reconciliations are in the tables included in our earnings release and slide presentation, both of which are available on our website. After our prepared remarks, we will take your questions. I'll now turn the call over to Kevin.

Good afternoon, and thanks for joining us to discuss our first quarter financial results. 2021 is off to a great start, and we are excited to share the results with you. Today, I'll discuss quarterly highlights and provide additional perspective on some recent product launches that we believe position Rackspace technology exactly where the market is moving. As I've done in past quarters, also touch on some case studies of customers who are doing truly innovative things with cloud technology. Then our president and chief financial officer, Amar Malatira, will go into detail on the financial results before I make some concluding remarks. Slide five shows the main messages we would like to deliver today. First quarter was very strong for Rackspace technology, and we exceeded the guidance targets we set in late February with record revenue and very strong earnings growth. The tectonic shift to multi-cloud, as well as the success We had onboarding new logos in 2019 and 2020 are expected to fuel double digit revenue growth throughout 2021 and beyond. You've heard me say that 2021 is going to be the most exciting year for new product launches in the history of the company. And in the first quarter, we launched Rackspace Elastic Engineering and Rackspace Services for VMware Cloud, which had been extremely well received by industry analysts and customers. I'll talk more about these in a moment. The work that our finance team has done to improve cash flow drove a significant turnaround in the first quarter with strong growth in operating cash flow. Amar will discuss this in his section. It also bears repeating that our first quarter debt refinancing put us in a position of strength from a balance sheet perspective for years to come. As we've noted previously, we now have no significant debt maturities for the next seven years. And in addition, our debt was booked at historically low interest rates. In fact, the $550 million financing that we completed in February was the best pricing ever for a non-investment grade senior secured notes offering. Turn into slide six. We posted another record quarter with revenue up 11% compared to the first quarter of 2020 to $726 million. Core revenue growth was even stronger, up 15% year-over-year to $677 million. This strong growth was driven by continued momentum in our multi-cloud business. We are winning new customer engagements and expanding share of wallet with the customers we onboarded in late 2019 and throughout 2020. As a result, we believe we are expanding market share in cloud IT services. Earnings leverage continues to be excellent, Non-GAAP operating profit was $119 million, and non-GAAP earnings per share was 23 cents, up 10% and 44% respectively compared to last year's first quarter. And we see opportunity for additional earnings leverage. Amar, now in a six-month, has taken a fresh look at everything we do. As a result, we have driven a number of changes in our decision-making process and management systems. To give you a few examples, we revamped the way we analyze deal profitability and decide which deals to pursue. This, in turn, has informed how we structure our sales force and which product lines we lean into for growth. We have reexamined our expense structure and uncovered additional efficiencies that we can drive in 2021 and beyond, and identified areas where we can invest these savings to accelerate the trajectory of our top line. Additional discipline and working capital management has led to a significant turnaround in cash flow. Amar will provide more details in a moment. And we continue to improve our investor reporting and give the investment community more insight into our growth drivers and value creation strategies. New sales bookings in the first quarter were $244 million, up 6% compared to the first quarter of 2020. This was a solid bookings quarter. The year-over-year bookings growth was lower than in past quarters for a number of reasons. Firstly, we are lapping our own efforts and are up against tough compares from a bookings growth standpoint. This will continue throughout the year as we landed a number of marquee multi-cloud deals, including the State of Texas deal in the second quarter of last year. So while we expect continued strong bookings in 2021, the year-over-year compares will be more modest. we remain confident in our revenue guidance for fiscal 2021 and expect double digit revenue growth for the year. Secondly, we are focused on driving the right mix of business and increasing the initial margin we are willing to accept on new deals. This is a benefit of the booking success we've had as we now have a significant install base of enterprise accounts that will serve as a foundation for our growth. Thirdly, We adjusted sales incentives and realigned our sales force to prioritize high value deals in line with our land and expand strategy. As these changes have taken root, we are encouraged that bookings accelerated and grew sequentially each successive month of the year. Slide seven shows how we're evolving the strategy of the company. We have gotten encouraging signals from customers that they see us as the opposite of the global systems integrators or GSIs, This is because we bring the benefits of a GSI, including size and scale, but unlike the GSIs, we're also cloud-focused, disruptive, flexible, fast, agile, and we have our fanatical customer experience. So we are staking our claim as the un-GSI. We believe this makes a clear statement with customers and prospects about who we are and the competitive advantages we bring to the table. On slide eight, Our positioning as the un-GSI as well as market trends have influenced our product development efforts. As a result, we recently introduced two new offerings that we believe hit the sweet spot in the market. Many of you participated in our webinar on Rackspace Elastic Engineering in April, and that service offering has garnered significant early interest from customers around the world. Last week, we introduced Rackspace Services for VMware Cloud, as VMware is in many cases the platform of choice for private cloud workloads. Looking forward, we believe VMware is an important fourth cloud platform alongside AWS, Azure, and Google Cloud. On slide nine, Rackspace Elastic Engineering is the next iteration of our service blocks. We are very excited about this new offering and believe it is exactly what the market needs to move cloud adoption to the next level. Rackspace Elastic Engineering is on-demand access to a pod of multidisciplinary cloud specialists who will know the customer's application, team, and desired business objectives and will be laser-focused on driving their cloud outcomes. The pod will work seamlessly with the customer's internal DevOps teams, essentially becoming a trusted part of their permanent cloud team. The pod is capable of delivering a broad spectrum of outcomes without the constraints of a fixed scope of management. This is a complete opposite of how a GSI structures and prices their services. Rackspace Elastic Engineering is already available and fully supported across AWS, Azure, Google Cloud, and VMware. This really cracks the code for customers who are trapped between running their traditional operations and evolving to be more cloud native and modern. After just a few weeks, Elastic Engineering has been one of the most successful new product launches in Rackspace history. We've already closed significant deals in all three regions of the world, and the pipeline for this offering is growing very fast. On slide 10, last week we announced our rebranded private cloud offering, Rackspace Services for VMware Cloud. In conversations with customers, it became clear that they needed a solution that provided a public cloud experience with private cloud security, data sovereignty, low latency, and pricing flexibility. We are excited about this offering and view it as a way to significantly increase growth in private cloud and further extend our lead in multi-cloud. In addition, this offering aligns to our CapEx Lite business model. And in the early going, it is clear that customers were hungry for this kind of architecture as we are off to a great early start with this offering as well. As I've done in past quarters, I'd like to highlight some customers who are doing truly innovative things in the cloud. On slide 11, let's talk about Porsche, which is a signature enterprise cloud customer for Rackspace technology. As you can imagine, automobile manufacturing is a complex undertaking in a complex industry and it requires best-of-breed systems and tools across a variety of IT environments to execute at the very highest level like Porsche does. So Porsche is in many ways a textbook case study for multi-cloud, as the company leverages all three hyperscalers, AWS, Microsoft Azure, and Google Cloud for its cloud environment. Accordingly, we are very proud to have been selected as Porsche's cloud partner of choice to help this world-renowned automaker harmonize and govern its multi-cloud platform. On slide 12, Autodesk subsidiary Innovize is one of the preeminent software companies for the water industry. The company knew that it needed to be on the technological forefront to continue to lead its industry. They had to modernize their solution, which was a desktop app with on-premise client servers. While the company had highly skilled SaaS engineers and machine learning and DevOps teams, they did not have the resources to meet an aggressive timeline. Pivoting from a desktop-centric product suite to a SaaS solution would require all hands on deck. They needed to bolster their teams with equally skilled engineers. With Rackspace Technologies' help, they built and introduced Info360, a SaaS offering based on AWS, which also included advanced IoT analytics using real-time data. The new platform was built with serverless technology, and microservices enabled their customers to transfer their asset network information to the cloud. It also leveraged geospatial mapping functionalities, which were previously available only with additional third-party software. I'm so proud of the Rackers who helped Innovize meet its aggressive timelines, so that it could maintain its lead in the industry. Now, Ammar, we'll take you through our financial results in more detail, then I'll make some concluding remarks before we open for Q&A. Ammar?

Thank you, Kevin, and thank you everyone for joining our call today. Slide 14 recaps our financial results for the quarter. Demand trends across our customer segments and geographical markets continue to remain robust, which coupled with strong execution, drove another quarter of double-digit top and bottom line growth. In our first quarter of fiscal 2021, we posted revenue of 726 million, an increase of 11% year-over-year. This was ahead of our expectation, driven by strong performance in our core business. Our core business revenue at 677 million grew 15% year-over-year. Non-GAAP gross margin at 34.4% in the first quarter came in within our expected range and was down compared to prior year, reflecting the mix shift from strong growth in our multi-cloud business, decline in our legacy OpenStack, and ongoing investments. While the mix primarily impacted our gross margins, our operating margin at 16.4% was relatively unchanged year over year. Compared to prior year, non-GAAP gross profit at 250 million was down 2% due to decline in our legacy OpenStack revenue, partially offset by growth in gross profits in our core business. Our non-GAAP operating profit was above our expectations at 119 million, up 10% year-over-year. This was a result of operating leverage from strong revenue growth in a multi-cloud business and OPEX efficiencies primarily in G&A. Non-gap earnings per share at $0.23, likewise, beat our expectations and was up 44% from last year. This reflected strong growth in operating profit and also lower interest expense from debt repayment and our recent debt refinancing. Slide 15 shows the company's revenue mix in the first quarter by segment and by geography. Multi-cloud continues to represent the vast majority of revenue at 80% of the mix, and it grew 14% year over year. Apps and cross-platform at 13% of total revenue grew 19% year-over-year, driven by strong performance in application services, coupled with strength in our data and security services businesses. OpenStack, which is our legacy business, declined 23% in line with our expectations. This segment now represents only 7% of total revenue. From a regional perspective, Americas continues to represent 75% of our revenue and had a solid 11% year-over-year growth. APJ grew at 28%, while EMEA grew 8% year-over-year. Now, moving to slide 16, let me give you more color on our multi-cloud segment, which represents 80% of our total revenue. The trending bar chart on this slide shows a successful strategy of driving the significant mix shift to the higher growth markets within this segment. The purple bar represents estimated revenue from our solutions in high growth markets, which includes all four cloud platforms, AWS, Azure, Google, and VMware. The gray bar represents revenue from our solutions in low growth and mature markets, primarily non-VMware private cloud and managed hostings. This chart really shows the business transformation that's taken place since mid-2019. We leaned into high growth areas of the market, such as managed public cloud by winning new logos, while also proactively transitioning some of our existing customers to newer cloud platforms. This was a purposeful strategy to extend our customer relationship and position us well in an attractive and growing cloud services market. On a trailing 12-month basis, in our fiscal first quarter 2021, our revenue in high growth markets made up approximately 65% to 70% of our multi-cloud segment revenue and grew roughly between 30% and 40% year over year. Within this segment, our managed public cloud revenue grew even faster, outpacing the overall public cloud market growth. We are targeting the high growth revenue mix within this segment to exceed 80% of total multi-cloud revenue in the next 12 to 18 months. We believe our gross margins will stabilize within 12 to 18 months period for two reasons. First, this makeshift within the multi-cloud segment will be largely complete, and the majority of our revenue in multi-cloud will come from high growth areas. Second, we are confident that our land and expand strategy with the new customers we have onboarded since early 2020 will work and drive higher margins in the installed base. I'll explain why we have this confidence in the next slide. All this bodes well for Rackspace to deliver long-term growth and profit through both revenue growth and operating margin expansion. On slide 17, you see some proof points of a land and expand strategy with two very different real customer examples. Delivering a solution which includes cloud services and infrastructure is a key value proposition to help customers optimize their costs. It creates stickiness in the relationship and provides an opportunity for Rackspace to upsell and cross-sell more higher value solutions. In the first case on the left, we show a long-term customer in the financial services industry. In this case, we led with services and as infrastructure mix grew, you can see a modest decrease in sold gross margin. But as we have cross-sold additional services to this customer, you can see that the margin rebounds and exceeds the starting point. On the right is a relatively new customer in the manufacturing industry. This was one of the new logos we onboarded in the first quarter of 2020. Again, you can see that the initial services-led margin is high. And as the customer deploys a multi-cloud solution, which includes cloud infrastructure, the margin dips. But then as we expand our relationship with higher value services, the margin recovers. These are the types of customer use cases that we are focused on replicating across our entire customer base. And we are having some good success in this regard. On slide 18, we analyzed the managed public cloud customer cohort from the first quarter of 2020. And as you can see, our cumulative bookings have increased 21% in the first year, and sold gross margins have expanded over 200 basis points. This is an area that has intense focus in our weekly management system meetings, ensuring that we continue to execute our expand strategy. It is also one of the areas for which we elevated the focus of our sales force and account teams and aligned our incentive plans. Slide 19 provides a snapshot of our cash flow and balance sheet. Cash flow was strong in the first quarter due to improved working capital management. We had operating cash flow at 103 million and free cash flow was 66 million. Total capital expenditures in the first quarter was $59 million, and total capex intensity was 8% in line with our expectations. Please note that in the second quarter, we are renewing several large multi-year enterprise license agreements, or ELAs. The accounting treatment for these renewals requires us to recognize the full amount of these ELAs as capex in the period the deal is signed, even though the cash payments are spread out over time. Accordingly, we expect second quarter capex intensity in the low teens, which is in line with our plans. But for the full fiscal year of 2021, we expect capex intensity to be in the range of 7% to 9%. Our cash capex was $37 million, and cash capex intensity was 5% in the first quarter. For fiscal year 2021, we expect cash capex intensity in the 4% to 6% range. Total cash at quarter end was 198 million, and we had 375 million of unused revolving credit facility. On slide 20, we have our guidance for the second quarter and fiscal 2021. For the second quarter, we expect revenue in the range of 735 to 745 million, which at the midpoint is 13% year-over-year growth. core revenue of 690 to 698 million, which at the midpoint is 16% year-over-year growth, and non-GAAP operating profit in the range of 113 to 117 million. This guidance reflects continued investments and makeshift to high growth areas in multi-cloud. We also expect non-GAAP earnings per share in the second quarter in the range of 21 to 23 cents, non-GAAP other expenses of $52 to $53 million, non-GAAP tax expense rate of 26%, and we expect non-GAAP weighted average shares of $214 to $215 million. We have made no changes to our guidance for the full year, except for a minor change to the full year non-GAAP other expenses and 2021 weighted average share count. After six months at Rackspace, I am more convinced than ever that we have a lot of opportunity and runway for continued growth and shareholder value creation. I will now turn the call back to Kevin for closing comments. Kevin?

Thanks, Samar. Before we open the call for your questions, let me say that I'm proud of the first quarter results, which we believe were a strong validation of the Rackspace technology investment thesis. We continue to grow both total and core revenue by double digits. The earnings leverage inherent in our business model and our cost transformation programs are driving significant improvements in year-over-year profitability. Finally, in the first quarter, our discipline with working capital assets resulted in a dramatic increase in both operating and free cash flow. Most importantly, we are continuing to position the company for consistent, ongoing growth and earnings leverage. The new customers we landed in 2019 and 2020 provide a strong growth foundation, and the continued tectonic shift of workloads to the cloud will provide secular tailwinds for years to come. Our new market positioning as the un-GSI, as well as the new service offerings we've introduced in 2021, position Rackspace Technology as the clear partner of choice for companies that want to migrate their business to the cloud. we are already seeing significant traction in the market for these initiatives. Also, we are committed to driving cost efficiencies and making ongoing growth investments to continue our financial momentum. So I remain excited about our opportunities in 2021 as we continue to see double digit growth in both revenue and earnings per share for the full year. And with that, we will take your questions. Operator.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, once again, you may press star and then 1. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the buttons to ensure the best sound quality. Once again, that is star and then 1 to join the question queue. Our first question today comes from Ramsey Ellisall from Barclays. Please go ahead with your question.

Hey guys, this is Ben on for Ramsey. Thanks so much for taking my question. Um, wanted to ask about the, the first, the pace of bookings growth. Um, I know like some time ago we had talked about kind of like a low double digits, low teams kind of growth rate over like the next several years. Um, and I, you know, understanding that you're locked in some tough concepts, that's sort of what we should expect as we kind of lap those comms and get into 2022. Is that sort of a reasonable expectation?

Hey, Ramsey, it's Kevin here. Thanks for the question. So I'll kick off here on bookings and I'm sure Amar will have a few things to add. So as a reminder, Ramsey, the figure for bookings that we report is only new business bookings and the $244 million of bookings in the first quarter is very healthy. New business bookings is just one of the factors in our revenue growth alongside recurring revenue. You know, there's renewals, contract extensions, churn, implementation, and revenue realization. That one component of revenue, new business bookings grew a healthy 6% year on year. We were also more selective in the first quarter about the deals we pursued because we onboarded a significant install base of new customers in 2020 and now can increase our initial margin on new deals. This, in addition to our land and expand strategy, drove a significant increase in sold gross margins in the first quarter. So overall, you know, new bookings were solid. We're committed to our revenue guidance for the year and double digit revenue growth in 2021 and beyond. Ammar, do you want to add something?

Yeah, let me add here, Ben. So just stepping back, when you take a look at bookings and the revenue growth correlation here, we've been executing very well on the sales front. We have had strong year-on-year bookings growth for the past seven quarters. And what this has done is this has significantly increased the baseline of our bookings, which captures incremental new business, as Kevin mentioned earlier. So at an annualized bookings baseline of roughly a billion plus, we will be able to deliver double digit revenue growth in 2021 and beyond. And having said that, we are focused on continuing to drive bookings performance going forward. Hopefully that answers your question.

Yeah, very helpful. Thanks so much. If I could ask one more. Just in the quarter, apps and cross-platform, the revenues came in a bit higher than we were expecting, which is great to see. Is that related to maybe like the timing of the state of Texas deal, or is that just kind of a broader outperformance? And is that level of revenue growth kind of indicative of what we should see in that line for the rest of the year, or should it perhaps moderate a little bit? Thanks so much.

So that's a great question. So it was very broad-based. It was not just application services. So within the applications and cross-platform, we have three services offerings at a high level. There's an application services offering, there's data services, and security services. And we saw broad-based growth across all those three service offerings. And of course, application services also benefited from the Texas DIR deal. So you should expect that kind of level going forward. Now, it'll moderate here and there because, you know, some of it is transactional business, but we are confident on this particular portfolio.

Yeah, I would also say, Ben, you know, we're pretty excited about this area. You know, we've got lots of investment that we're making in cloud-native application development, artificial intelligence, machine learning, a lot of our, you know, IoT and edge computing services here. So, yeah, broad-based and, you know, when you kind of look at the, short and medium term future, you know, we're pretty excited.

Yeah. So just to add there, you know, we'll be, we were at about $97 million in Q1. You know, we should be slightly in that particular range, you know, between say 93 to 97 going forward. There'll be some quarters will be up, some quarters will be down based on, you know, based on the seasonality of the business.

Okay. That's super helpful. Thank you guys so much.

Thanks, Ben. Our next question comes from Amit Daryanani from Evercore. Please go ahead with your question.

Thank you very much for taking my question. I have two as well. You know, I guess first maybe if I just go back to the free cash flow discussion, Amir, a little bit. Really good match for the performance for sure. Maybe just walk me through, given some of the comments you had around Q2, how should we think about free cash flow conversion as we go forward? And, you know, do we think Q2 is a bit negative? And then you ramp up in the back half.

So overall, I think, as you know, Amit, there's an intense focus in the entire company around free cash flow. And I often repeat my CFO mantra in the company. As I say, revenue is vanity, property is sanity, and cash is reality. The entire company has heard this hundreds of times since I joined the company in November. And I think we have a tremendous opportunity to continue to drive improved cash flow. And we are executing against the transformation program that we talked about in the last quarter that addresses the entire life cycle of cash flow, including forecasting the cash flow, the collections aspect of it, credit terms, the payables, and so on and so forth. So I would say we will deliver a significant increase in cash flow from operations as well as free cash flow compared to fiscal 2020. So fiscal 2021 should be much higher than fiscal 2020. And there'll be some quarters will be lower, some quarters will be higher. But I do believe what we are focused on is to driving higher and healthy quality of earnings. And I believe our cash flow from operations should be roughly about 80 to 85% of our operating income in the longer term. So that's what we are focused on.

Got it. And if I could just kind of, go back or kind of have you guys talk a little bit on the gross margin line for the March quarter. You know, year over year, I think the performance is sort of notable in terms of the drop. I know you guys have talked about this in the past. So I'd love to understand when you look at the gross margin contraction on a year over year basis, how much of that do you think was due to investments Rackspace is making in their business versus mixed implications? I'd love to understand those two buckets. And then, you know, should we feel comfortable that gross margins have troughed for calendar 21 at this point. Thank you.

Yeah, so let me start here by saying, you know, our gross margins are not declining due to any competitive pricing or market pressures. And the declining gross margin is mainly a result of mix shift in our business driven by three factors, very clearly. First is, as you know, our open stack business, which is a legacy business is declining as expected. And this is a higher margin business. So there's an unfavorable mix impact. Second, we are onboarding new business with initial low margins due to the higher mix of cloud infrastructure in the solutions, as I discussed earlier, and also the startup costs associated with it. And third is customer migration from older generation private cloud offerings and managed hosting to newer cloud platforms. And in many cases, we are proactively managing this for our customers. So all this has a near-term dilutive impact on the gross margins. because the older generation offerings were CapEx intensive. And now as we drive, and it also had higher gross margins. While the newer offerings that we are selling are CapEx light, it has initially low gross margins, but as we upsell and higher value services, the gross margins improves as has shown in the earnings presentation with the Q1 2020 cohort of customers. So Amit, we believe our gross margins will stabilize within the next 12 to 18 months. For two reasons, as I mentioned during my prepared remarks. First is this makeshift to high growth areas within the multi-cloud segment will be largely complete. And second, as we discussed, we are confident that our land and expand strategy with the new customers that we onboarded will drive higher margins in the install base. With that said, I do expect even during this period, our operating margins to remain in the mid to high teens in line with other best-in-class US-based IT service providers.

Does that help Amit? Yep, that's really helpful Amit, thank you. Thanks Amit. Our next question comes from Ashwin Shervaikar from Citi. Please go ahead with your question. Hey, guys. Hi. Hello, can you hear me? Hey, I can hear you. Thank you.

I guess, you know, Mike, I wanted to ask about the, you know, the pipeline that you're seeing in terms of the split between multi-cloud and apps versus apps and platforms. Are you beginning to see maybe a shift towards more apps across platforms? And then sort of a related question, as you introduced Elastikan's name, does that, down the road, have an impact on looking because of the way stuff gets fixed?

Right. Thanks, Ashwin. Yeah, I'll start with that. And then Amar, you can jump in as well. So let me give you just a little bit color on the pipeline as you had asked. And then I'll talk about apps and cross-platform as it relates to the pipeline and then elastic engineering and kind of what I see there for the future. So Ashwin, pipeline's strong, healthy, continues to build. As I did mention on the earnings call, we are being more selective on the deals we pursue. So I'd also say it's a very high quality pipeline. pipeline of higher margin deals. So excited about the pipeline. It's growing. And I would say it's broad-based. There's still a massive opportunity in multi-cloud, but we are seeing a lot of opportunity in apps and cross-platform as well. So I would say really high in both areas. I'm really excited about the early signs of Rackspace Elastic Engineering. You know, really, you know, we believe reinvented managed services for the cloud with Rackspace Elastic Engineering. And what's happened here, Ash, when it's just really shortened our sales cycles on these deals, which is great, you know, for future conversion to revenue. Rackspace Elastic Engineering, one of the most successful new product launches in the history of the company, you know, closed many deals already, closed another one in Europe over the weekend. So in three weeks, of this offering being released, you know, signed deals in every region, new and existing customers. We've got nearly 100 new business opportunities identified for Rackspace Elastic Engineering. So excited about that one. Excited about Rackspace services for VMware Cloud. That was just released on Thursday of last week. That's going to be, you know, tremendous as well. Pipeline for professional migration services, you know, is growing very strong also.

Got it.

And then a question, I guess, for Amar. You know, after 4Q, you provided a very detailed split across quarters in terms of the cadence that we should expect. Would you say that anything has changed relative to what you indicated back then in terms of either revenues and profits?

I think, so thanks Ashwin for the question. So our guidance for, I've not changed the guidance for the full year. And let me give you, let me start with the big picture here and answer your question on the seasonality and the polarization of the guidance. So if you look at the big picture and if you look at the first half profit in total, I'm just talking on the operating profit side and then I'll come to the revenue side too. If you look at the first half, operating profit in total. We are on pace with our original guidance, even with the lower expected Q2 operating profit. And then going forward, let me walk you through the four key drivers of improved second half profitability. First, as I've indicated earlier, the seasonal expense headwinds, such as the US payroll taxes that impacts our first half are weighted more towards the first half and will subside in the second half of the year. Secondly, we are also making investments, as I mentioned earlier, in the business that are going to be sort of moderate in the second half. Third is we have OPEX efficiency programs that will kick in and generate additional savings in the second half compared to the first half. And finally, the second half revenue growth will be higher than the first half and will also drive incremental profit. Now, this is all baked into our full year guidance. So in summary, feel good about the full year guidance, and we expect to be within the guided range for revenue, for operating profit, as well as EPS. And as you can see, in the first half, we are exceeding, particularly on the revenue side, we are exceeding the midpoint of the guidance. And so I think there is a little bit of an upward bias to the revenue compared to the midpoint of the revenue guidance for the full year.

Thank you.

Our next question comes from Frank Luthan from Raymond James. Please go ahead with your question.

Great. Thank you. Walk us through some of the cost savings initiatives that you're putting into place, and where should we see those show up? And then talk to us a little bit about churn. What has that been running, and do you expect anything different in churn for the remainder of the year? Thanks.

Sure. So let me start with the question on the cost savings. You know, one of the things that I keep reminding people is, you know, first of all, the cost takeouts and OPEX efficiencies are all embedded within our guidance. So we would encourage you to follow the guidance from that perspective. But we approach cost initiatives overall the same way we approach sales. We build a funnel of efficiency programs, which we regularly fill and convert. And that's how we look at it. And so just specifically on say OPEX side, because I do believe there is immense opportunity on OPEX to continue to drive efficiency. There are four areas that we are focused on. First is more automation and streamlining processes. Now this is, I would say Frank, this is technology driven efficiency programs and productivity improvements that will come through automation. That is the first one. Second is leveraging the GNA as revenue grows and also increasing the leverage of partner R&D, the product development cost that they put in, as well as the market development. So we can leverage that given the relationship we have with our partners. Third is driving higher offshore mix across the company. I do believe that there is a huge opportunity there. We need to continue driving that as we grow. And the fourth is on the non-labor expense side. there are various ways to optimize our non-labor expenses through supply chain management. We can optimize our real estate footprint. There are legal entities that we're looking around the world to see how we optimize those legal entity, do better management on the vendor side. So these are all the cost savings initiatives that we have in the funnel that will continue driving as the business model continues to transform. And we will reinvest some of it back into the business as we have done to continue driving the top line growth and also investing in continuous automation and productivity improvements.

Hey, Amar, do you want me to start on? Yeah, please, please go ahead. Hey, Frank, it's Kevin. Yeah, it's a great question on churn. I'll just give you a little color here. I would say churn, particularly for the newer offerings, is coming up, I would say, very favorably, certainly compared to my expectations and compared to, you know, some of our, you know, older offerings. So that's really, really encouraging that the, you know, the new product offerings that were coming out are not just growing fast, but, you know, customers are keeping them and keeping them, you know, longer. And certainly, you know, this, this area of the business has performed, you know, better than, you know, I had expected. So that's, that's really, you know, I think, I think very, very positive. This is obviously a revenue lever for us that we continue to spend a lot of time with our management system, with our leaders, with our customer success representatives in the field. We've got a close feedback mechanism into our new product development. So I feel like we've got a really good kind of system here to drive further benefits for the company.

All right, great. Thank you very much.

Thanks, Frank. Our next question comes from James Breen from William Blair. Please go ahead with your question.

Thanks. You talked about bookings early on in the Q&A. I was wondering, can you just give some color around how the bookings growth sort of translates to revenue growth given sort of the land that expand as you think about the 6% year-over-year and then sort of the double-digit growth in the revenue side? Thanks.

Yeah, thanks, James. How about I start on that one, Amar? Yeah, absolutely. Go ahead, please. Yeah, so a little bit more color, James, on the bookings. First of all, 6,300 deals in the quarter, very diversified bookings, broad-based strengths across geographies, customer segments, and industry. We're pleased with the additional rigor sort of resulting in expansion in sold margins for deals during the quarter. So that's good. We see momentum in large deals with more than a million dollars recurring revenue. Those were up double digits in the year. The other thing, James, we signed 25% more new logos than we did in last year's first quarter. Excited to see continued momentum in mid-market enterprise as well. those two customer segments, you know, just to name a few wins. We talked about Porsche and my prepared remarks. Apria Healthcare was a great win. TSB Bank in the UK, Aramex in the Middle East. So again, broad-based and mid-market and enterprise as well. So pleased with the momentum. Yeah, Amar, do you want to cover kind of the translation question?

Sure. I think, listen, I think the way I would like to answer this question is, you know, why are we confident about a double-digit core revenue growth, whether it's sustainable or not? And the way I think about this is, as I mentioned earlier, that we had a strong year-on-year bookings growth for the past seven quarters that has really elevated the baseline of our bookings, which captures incremental business, as I mentioned earlier. And When we take a look at our baseline, if you're in the baseline, annual baseline of roughly about a billion dollars, I think you should be able to, because this is all incremental business that comes from new logos, as well as new business from the existing customers. It should be able to drive double digit growth in revenue. That's how the model works. And second also, we have a high mix of recurring type revenue, which drives good visibility into the future. So we really feel good about the revenue growth sustainability in 2021 and beyond. And for example, the midpoint of our 2021 revenue guidance indicates that 14% poor revenue growth up from a performer growth of about 9% last year. So that shows you that the baseline has gone up and elevated that we can continuously drive double digit growth into 2021 and beyond.

I would add, Amar, would you agree our confidence in the sustainability of our revenue growth has even increased since the last time we reported?

Absolutely. Great. Thanks.

Our next question comes from Matt Cabral from Credit Suisse. Please go ahead with your question.

Yeah, thank you. Kevin, you called out some revamped deal profitability metrics in your prepared remarks. You kind of alluded to them a couple of times during the answers as well. Just wondering if you could expand a little bit more on what the changes are that you've made and just if that's had any impact on how you think about forming sales quotas and the different metrics that you count the Salesforce on.

Hey, Matt, great question. So, yeah, absolutely. You know, always... looking to continue to raise the bar on sales performance and continue just to capitalize on this, I think, once-in-a-generation opportunity here in multi-cloud. So, Matt, what we did in the first quarter, particularly in the Americas region, we sort of realigned the team to kind of ensure our sales professionals, our solution architects, all of our customer success team members were aligned, particularly on this land and expand strategy that we've been talking about a lot. We kind of enhanced our regional structure to increase accountability. We did and also improve our customer sales coverage. We did a lot of work on that. We also adjusted our compensation plans to support, you know, all the goals that we had for this year, including selling higher margin deals. So, you know, we're very pleased with kind of the early signs of how those changes have you know, have materialized here in the results and in the pipeline. And we expect these changes to help us continue, you know, both winning new logos and, you know, accelerate the success of this land and expand strategy.

Got it. And then thanks for all the additional detail you guys gave on the multi-cloud business. I guess, so it's pretty clear from the charts that the margin on services is higher than infrastructure, but I'm curious if you can comment on just the magnitude of the spread between the two. And I guess what I'm really trying to get at is if I take a step back, this segment used to do profitability in the low 40s from a gross margin standpoint. And I'm just wondering, as the services mix on public cloud matures, do you think you'll be able to get back to those levels? Or should we start thinking about maybe rebasing to a different margin structure as the mix shifts more toward cloud going forward?

So, well, listen, I think I'm not going to give specific guidance here on the margin, on the gross margins. But as I mentioned earlier, that if you think about a gross margin profile, today we are in a transient stage as we are having a major mix shift going on in the business to high growth areas as we are onboarding new customers and also migrating existing customers. So you have both those headwinds from a margin perspective initially. We do believe that the gross margins will expand as we upsell and cross sell more services. And you saw, Matt, in one of the charts that I provided, which was taking the Q1 cohort of customers, where we were able to expand the gross margins by about 200 basis points plus, while growing the bookings about 20 plus percent, right? Now, I would want you guys to focus on operating margins which we will continue to operate between the mid to high teens because of all the operating leverage we have in the model, as well as the ongoing OPEX efficiency programs. So just to give an example why we should be focused on that, and we do believe that the gross margins will stabilize. If you think about gross margins, let's say our corporate average is, say, mid-30s today. When we sell incremental business, even if the gross margins in those incremental business in a current install base, say comes in below the corporate average, let's say, I'll just make up a number here, say 30% or so, we would spend about maybe five to seven percentage points of that in incremental SG&A. And you will see at least 20 to 25 points actually drop to the operating profit line. So which means that there's such a high operating leverage in the model, it creates an upward bias to your operating margin rate. That's how you should be seeing this business. So currently, Matt, the way I think about it is for the next 12 to 18 months, we'll be in the transient phase. It will stabilize. But ultimately, we want to drive operating margins into mid to high teens. And as we start selling, upselling and cross-selling more services, you should see a put bias on those operating margins and operating margins have a tendency to start expanding. So our long-term goal is to grow revenue, grow profit faster than revenue. The only way you do that is by expanding your margins.

Thank you.

Our next question comes from Dan Perlene from RBC Capital Markets. Please go ahead with your question.

Yes, good evening. It's actually Matt on for Dan. Following up on the bookings question, is there any way to kind of frame the sort of amount of deals that you've walked away from because of the new focus on corporate profitability, and then I have a follow-up.

Yeah, I'll start there.

You know, in terms of the, you know, the more selective kind of approach that we took, Dan, in Q1, it was, you know, really as a result of the success that we had, you know, onboarding all the new logos in 2019 and 2020. So, you know, as a result of all that success that we had, we really have a strong foundation for growth for the next decade. So we spent, you know, quite a bit of time in that land and expand strategy as we kind of talked about. And now really our focus is on up-leveling the initial margin of the new deals that We run after to, to drive profitability. So I don't have a specific figure, um, other than to say, you know, we, we, uh, you know, we booked a good growth in bookings. Uh, we did it at higher margins, you know, our margins grew. So we're actually very pleased with that result. And as Amar, you know, kind of mentioned our, you know, our, um, our propensity for. you know, confidence and revenue growth just continued to increase. I think we did a really nice job balancing here. And it was because of the success that we've had with all the new logos and the onboarding, you know, last year and the year before. So we're in a really good spot here.

Okay.

And then as a follow-up, what are you seeing in terms of like employee costs, availability, etc.? ?

Yeah, so, you know, it's an interesting question here, Dan. You know, employee cost, as Amar mentioned, you know, we've got, you know, payroll taxes and things like that, you know, that make that cost heavier in the first half of the year compared to the second half of the year. You know, one thing to keep in mind about our business is we're really, you know, more of a technology company. and software-driven business than a heavy labor business. So in terms of the availability of resources and people, we're in a really great situation there. You may remember, Dan, we talked about we select fewer than 2% of our job applicants to the company. So very well positioned in terms of labor force availability. We continue to expand our labor. globally we've got a great workforce management system all aided by the fact that you know the core of this business is you know very strong because of Rackspace Fabric the software and the IP that that you know automates 75% of our multi-cloud workloads still we believe the highest automation in the industry so you know well positioned here as well I can just add quickly

I'm sorry. So I just wanted to add to Kevin's remarks there. At the end of the day, we have a good management system down internally to tightly manage our labor costs and non-labor costs. And we do that on a very regular basis and also a very good hiring engine as we ramp up, for example, professional services, because we are seeing a lot of opportunity for growth. in the migration services and cloud services in general. So feeling good about how we manage our labor and non-labor costs in this company.

Excellent, thank you. Thanks, Dan.

And our next question comes from Tinsen Huang from JP Morgan. Please go ahead with your question.

Hey, thanks. Yeah, I just had a follow-up on the being more selective comment you just made there. Just is it more your, maybe I may ask it differently, the initial pricing? Are you just being a little bit more, you know, careful with some of the deals or are you just taking a view on finding clients that meet a certain land and expand threshold? Just, just trying to make sure I understand that as best as possible. Thanks.

Hey, Tenjin. Yeah, I'll start and Amar, if you want to, if you jump in a little bit of both, really, you know, we, you know, we, we do have, you know, land and expand strategy. And as you know, we've got a very rigorous management system. When, you know, we set off on a program, we want to execute on it, right? You know, at Rackspace, we, you know, we get work done and we focus. So that certainly is a big part. You know, we landed all of these new logos. Amar mentioned, you know, the strategy, if you can't land, then you can't expand. So we landed and, you know, it's time to expand. So, And what that does is that is really quite beneficial for us because as you add new business to existing customers, you don't have to repeat the cost for new account managers and some of the infrastructure that we put in place and some of that more kind of recurring cost. A lot of that fixed cost is already there. So the beauty of expanding is that you can expand the higher margins. And that was certainly part of it. Part of it as well, and I'll let Amar talk to it, is kind of the rigor that he's brought in and really looking at the margins that we're willing to accept on new deals and really kind of raising, we talked about up-leveling that margin for initial deals. So really a combination of both of them is where we saw the lift in the sold margins in the first quarter. And we're pretty proud of that. Having said that, as we mentioned, I think we're doing a nice job of balancing that against just a tremendous opportunity in the market and, you know, our confidence in double-digit revenue growth.

Amar? I think you covered it very well, Kevin. I think I would just summarize by saying at the end of the day, you know, we are focused on return on investments we are making. There's a huge demand out there, and we can afford to be selective. And as you mentioned earlier, that, you know, if there is no expansion opportunity, I think there is no point of making an initial investment in those accounts. And so we take a look at where there are expansion opportunities and where we can make investments so that we can generate that return on those investments by selling higher value services in the future. And some of this relationship can extend for a decade. And we want to make sure that we are focused on selecting those accounts where we have an opportunity for expansion in the longer term.

Thanks for that. I'm confident you're being thoughtful about it. Just as my quick follow-up, staying on bookings, in the last quarter or last year, second quarter, you had a Texas contract. I think that was a mid-30 near $40 million number. So should we, at least for the second quarter, should we think about growth more sequentially from the first quarter base? I think I heard, Kevin, you say that bookings were improving month to month to month in the quarter. So this is why I'm thinking maybe we should look at it sequentially here going through the second quarter given the difficult comp.

Yeah, great, great question, Tenjin. I'll start. Amari, feel free to jump in. So, you know, I'll give you some color here. You know, we do not guide on bookings, but, you know, very confident in our pipeline. You know, I believe we've got a lot of runway to continue to grow revenue. Yeah, more difficult compares given some of the, you know, the state of Texas deal, like you said, last quarter, well remembered. You know, I'll just say we continue to see momentum. We did see, you know, sequential momentum monthly. so far this year, and we're working hard in May as well. You know, what I'll kind of just kind of point you back to is, you know, our bookings, you know, our bookings kind of projections internally are incorporating the guidance for revenue and committed to revenue guidance for the year, you know, feeling strong about that, committed to double-digit revenue growth in 2021 and beyond.

So I would just add very quickly, again, as Kevin said, we're not guiding on bookings, but we're also looking at the quality of the pipeline as well as quality of the bookings. It's not just the bookings dollar numbers, but how the revenue will get realized, what's the margin profile on those bookings, the length of the contracts. So there are multiple metrics that we use to make sure that we have the right mix of bookings and the quality of bookings that we deliver. And we feel good about it. And I think, as I mentioned, if you're operating at a very high baseline of $1 billion of bookings on an annualized basis, since this is all net incremental bookings, we're not putting renewals in it or any of those things, contract extensions in it. So since it's all incremental bookings, it really helps to drive a double-digit revenue growth if you are maintaining a billion-dollar mark or so. So I feel really confident. I've been here now for six months. I'm still a student of the business, but I've done a lot of analysis on how bookings should translate to revenue. What kind of bookings mix do we need to make sure that we deliver, continue to deliver double digit revenue growth at the right margin profile and how we will be able to go expand our margins in the future. And more importantly, continue to generate, you know, increasing free cashflow for the company.

Yeah. No, I appreciate it. It's one metric of many that's important, and it's new sales. But just figured I'd ask, understanding that the Texas deal was quite special last year. Thank you.

Oh, very true. Yeah, very true. Thank you. And, ladies and gentlemen, with that, we'll conclude today's question and answer session.

I'd like to turn the floor back over to Joe Crivelli for any closing remarks.

Thanks. That's all the time we have for Q&A. So if you have follow-up questions or if you'd like to schedule time with management, feel free to reach out to me at ir.rackspace.com. Thanks, everyone, for joining us today, and have a great evening.

Yeah, ladies and gentlemen, with that, we'll conclude today's conference. We do thank you for attending.